RBA: may raise rates

25th January 2008
By Petter Ingemarsson

The Reserve Bank of Australia may raise its interest rates in light of recent inflation figures.

Many industry observers expect the Reserve Bank of Australia to raise its interest rates as inflation reaches a 16 year high. The bank is set to hold a meeting in early February 2008 to discuss a possible rise to 7%. A further rate rise will no doubt place greater pressure on the already financially-strained Australian mortgage holders, and could even cause a higher number of repossessions.

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The Reserve Bank of Australia (RBA) is set to meet in early February 2008 to determine whether the cash target rate should be raised from its current level of 6.75%. Several indicators point to an imminent interest rate rise. Most importantly, recent inflation figures show that underlying inflation in Australia is currently in the range of 3.4-3.8% per year. This exceeds by far the RBA target band of between 2-3%.

The recent volatile Australian stock market movements reduced the likelihood of a February interest rate rise, but over the last two days the stock market has calmed to partially recover the losses incurred, following slashed interest rates in the US. The recovering Australian stock market puts additional pressure on the RBA, as most observers agree that financial market instability would be the only thing that could deter the RBA from raising rates.

Politicians on both sides of the political spectrum have urged the RBA to proceed cautiously and put off a rate rise as long as possible, citing the financial implications for their constituents. "It would be prudent for the Reserve Bank�to stay their hand and watch and wait for a little while longer," the shadow treasurer Malcolm Turnbull was quoted as saying. Several leading economists, however, have warned that inflation must be contained before it becomes entrenched in the market. The RBA must strike a delicate balance.

The current situation puts additional pressure on already stressed Australian mortgagors. A rate rise to 7% would increase the number of mortgagors facing mortgage stress and even repossession. The market is pricing the risk of an interest rate rise at 50:50, so the outcome of the next RBA policy meeting should certainly be interesting.
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